A Call for a Unified Business Organization Law

48 Pages Posted: 8 Jul 2011 Last revised: 30 Jul 2011

See all articles by John H. Matheson

John H. Matheson

University of Minnesota Law School

Brent A. Olson

affiliation not provided to SSRN

Date Written: January 1, 1996

Abstract

The authors propose a wholesale reformation of business organization law. The current regime of business organization law reflects an attempt to blend the benefits of limited liability with conduit or flow-through taxation. The result has been a haphazard development of business forms, often created to satisfy shifting federal tax law guidelines. The authors trace this development, from the traditional corporation and partnership forms through limited partnerships and Subchapter S corporations to the recent organizational forms of limited liability companies and limited liability partnerships. The authors show how the search for the ideal organizational form has failed, leaving an unwieldy morass of choice of entity issues for the business owner.

The authors propose a two-tier framework to overhaul existing business organization law and classification. Traditional corporations would continue in existence. The remaining myriad of business forms would be replaced by a simplified Standard Business Organization ("SBO") governed by a Standard Business Code ("SBC"). The hallmarks of the SBO under the SBC would be limited liability for owners, pass-through taxation, free transferability of interests, perpetual existence or continuity of life, and presumed owner management. These attributed conform to the default features most desired by business owners.

Consistent with recent changes by the Treasury Department and the Internal Revenue Service in the traditional entity classification scheme for taxation purposes, the two-tier framework combines the benefits of consistency, flexibility, and simplicity. Current laws and regulations governing business organizations formed as corporations would remain intact, allowing states to continue to "race to the top" (or bottom), and affording a substantial federal entity-level tax base from these entities. The SBC would provide a flexible, owner-oriented operational structure for the SBO while avoiding entity-level taxation, except where the SBO chooses to become publicly traded. The result is a vastly simplified system of business organization law that elevates the substance of desired business organization law elements over the form of attributes necessary to satisfy federal tax guidelines.

Suggested Citation

Matheson, John H. and Olson, Brent A., A Call for a Unified Business Organization Law (January 1, 1996). George Washington Law Review, Vol. 65, No. 1, 1996, Available at SSRN: https://ssrn.com/abstract=1874218

John H. Matheson (Contact Author)

University of Minnesota Law School ( email )

229 19th Avenue South
Minneapolis, MN 55455
United States
612-625-3879 (Phone)

Brent A. Olson

affiliation not provided to SSRN ( email )

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